An adjustable rate mortgage (ARM) is a mortgage whose rate of interest is periodically adjusted to reflect the current market conditions. Most ARMs have a short initial fixed-rate period (usually 3, 5, 7 or 10 years), followed by a longer adjustable period (over the remaining 30-year term). There are many positive aspects of an adjustable-rate mortgage, particularly the low initial interest rate, which is also known as the “teaser rate.” Generally, after the initial fixed-rate period, an ARM’s interest rate can adjust each year. However, there are caps on today’s ARMs that protect consumers and let them know up front the worst-case scenario for payment in the event that their rate adjusts upwards.

Some consider ARMs riskier than fixed-rate mortgages because of the potential for the rate and payment to increase over time. If you are looking for a predictable monthly payment throughout the duration of your loan, a fixed-rate mortgage might be a better fit. The majority of consumers who find an adjustable-rate mortgage to be the best choice plan to either move or refinance within a few years of purchase. The flexibility of lower monthly payments during this short-term period has the most benefit without consequence.

The best way to consider whether or not an ARM is the right choice for your situation is to map out your next five years. If you are transferred often for work, and don’t stay in one place for very long, an ARM could help you to keep the lowest monthly payment possible for the short time that you are in your home. If you need short-term savings to pay off moving expenses, or to do some landscaping on your new property, the initial savings before the rate adjusts upwards might be a good financial move.

Next week in part two, I will discuss the three major types and four key figures of adjustable-rate mortgages. Call me today to set up an appointment! I would love to review your finances and help you determine if an adjustable-rate mortgage is right for you.